TSLA Stock: Could This Country Curb Tesla Motors Inc’s Growth?

TSLA StockBad News for Tesla Stock?

Tesla Motors Inc (NASDAQ:TSLA) stock is up more than 70% since bottoming out in February. Much of TSLA stock’s rise has to do with the fact that the electric carmaker has now taken more than 400,000 global preorders for the highly anticipated “Model 3.”

Although Tesla hasn’t broken down where in the world those preorders were made, the company is hoping that a good chunk of them are coming and will continue to come from China.

China is Tesla’s largest market outside the U.S., with revenue last year of about $319 million. That accounts for almost eight percent of Tesla’s total revenue. (Source: “Analyst: Tesla Model 3 Won’t Be ‘A Game-Changer’ In China,” Benzinga, April 28, 2016.)

The country has become a major focus for Tesla. While Tesla faces the same hurdles that any foreign company faces when trying to enter China, the carmaker really wants to make China work.

And it’s with good reason. The potential in China is huge.

China is the world’s largest auto market, with approximately 20 million cars sold there last year. (Source: “Tesla Aims to Build Its Electric Cars in China,” The Wall Street Journal, October 23, 2015.) Of course that’s great for car manufacturers, but it’s terrible for the environment. And that’s why China’s government is giving out incentives in the hopes of putting five million electric cars on its roads by 2020 to help alleviate the country’s pollution problem.

That puts China on pace to also become the world’s largest electric car market, surpassing the U.S. (Source: “China forecast to become world’s biggest electric car market,” Reuters, December 6, 2015.)

To capitalize on that, Tesla says that it hopes to lock down a deal with a local partner to open its own factory in China to begin making cars there by the middle of this year. (Source: “Tesla wants a factory in China, and fast,” Engadget, January 25, 2016.)

But is the excitement about Tesla’s prospects in China a bit premature?  Will the Model 3 take off there like it’s doing in the U.S.?

According to Automotive Foresight analyst Zhang Yu, investors should temper their enthusiasm for China because the Model 3 won’t have the same impact in China that it’s having in the U.S.

“As the infrastructure for new-energy vehicles is not mature enough, customers will prefer cheaper models,” Yu said. “Although Model 3 is claimed to be an affordable one, the price is still too high.” (Source: “China second-largest market for Tesla’s Model 3 car,” South China Morning Post, April 28, 2016.)

Yu added that although the Model 3 “may manage to draw people’s attention,” it just won’t be a game-changer in China. (Source: Ibid.)

If that turns out to be true, that could hit TSLA stock hard because China’s potential is already priced into the stock.

But I don’t think that’s going to happen.

Sure, at U.S. $35,000, the Model 3 isn’t exactly cheap, but the Chinese government is throwing in a ton of incentives, including tax rebates, free charging, and skipping costly license plate lottos to get people to buy electric vehicles. (Source: “China Unleashing Another Beast Of An Electric Car Incentive,” Clean Technica, June 5, 2015.)

If Tesla is able to establish a plant in China soon before the Model 3 swings into full production, that will establish a whole bunch of cost savings on import duties and deliveries.

CEO Elon Musk also recently said that a production plant in China could cut the cost of the “Model S” by more than one-third. (Source: “Is There A Smoother Road To Success For Tesla In China?,” TechCrunch, December 27, 2016.) So some kind of cost cut could happen with the Model 3 as well.

Don’t forget, too, that once economies of scale are achieved, the cost of Tesla’s electric vehicles should come down in price, making them more affordable for the Chinese market.

The Bottom Line on Tesla Stock

Tesla shouldn’t have a problem selling its Model 3 in China, despite it possibly being a bit too expensive, according to one analyst. Tesla has lots of room for growth into China, especially with its middle class expanding so rapidly. If China turns out to be a major success for Tesla, look for TSLA stock to continue its upward trend.